Godzilla vs. Mothra, The Sequel

Amazon and Google are on a collision course.

When I was at eBay, we had a belief that no one was going to compete with us by replicating exactly what we were doing. We had first mover advantages and network effects. Amazon and Yahoo! both launched auction marketplaces in response to eBay’s strong growth, and both businesses were essentially DOA. What did concern us was that someone would compete with us with a new, disruptive approach—a completely different take on the business.

Early on, we came to believe that Google’s emerging search business was the biggest threat that eBay faced. eBay helped users find hard-to-find, unique products. Google’s goal of organizing the world’s information also helped users find hard-to-find, unique products. The mechanisms and models were different, but the overlap was clear and we came to view Google as our top competitive threat.

This thought was validated after the fact by then-Google executive Sheryl Sandberg. We both were guest speakers at the same Intuit event a few years back, and I stayed after my talk to listen to Sheryl. In response to a question, Sheryl said something along the lines of, “We knew early on at Google that our key competitor was eBay.” I almost jumped to my feet shouting, “I knew it!” It did not make me feel any better that eBay was one of Google’s very top advertisers at the time, and that we were paying them tons of money that they were in turn using to compete with us.

In Google’s case today, I am becoming increasingly convinced that their most challenging competitor isn’t another search engine like Yahoo!, Bing, Baidu or Yahoo! Japan. It’s Amazon, which is bringing a completely different take on search—in this case, product search.

Amazon is a vertical search engine focused on helping users find products. The overwhelmingly dominant way to find things on their site is the search box. Users enter a keyword phrase and are presented with results that match his or her query. The order of the search results is determined by algorithms that seek to optimize relevance and monetization. Sound familiar?

In my personal website use, I increasingly find myself searching for products on Amazon instead of Google. Shopping on Amazon is a superior user experience and it runs the table on the magical retailer formula of selection, price and convenience. It has an increasingly comprehensive product assortment, with their ever-expanding direct sales supplemented by third-party merchants who sell on the platform. Prices are almost always extremely competitive, so much so that I have pretty much stopped using Google to comparison-shop at different merchants. And it offers the fastest and most cost effective shipping solutions, particularly in Prime (which has the interesting impact of making me want to buy goods on Amazon to make sure I get the most out of my $79/year Prime membership). I can buy an item on Amazon in a minute, secure in the knowledge that I’m likely paying the lowest price while getting free shipping and fast delivery.

Contrast that with the shopping experience on Google. Shopping on Google is work. It has infinite selection…if you can manage to find what you’re looking for amidst the forest of search results. You have to work to find the best price, typically by pogo-ing in and out of different search results to check both prices and shipping costs. And when you find a product you want to buy from a new merchant, you need to enter all the payment and shipping information from scratch. Buying on Google takes chunks of an hour, not an Amazon minute.

Apparently, lots of consumers are behaving like me. Amazon is on a growth tear and is rapidly gaining share of e-commerce. A quick calculation suggests its $35 billion of 2012 net sales in North America represented a whopping 16% market share of total North American e-commerce. And this probably understates their true position. Amazon’s revenue recognition policies allow them to record only the commission and shipping fees on sales by third-party merchants as revenue. If you were to consider the actual consumer spend (comparable to eBay’s Gross Merchandise Volume number), then their share would be substantially higher.

E-commerce merchants now also have a very viable advertising alternative to Google: they can list their products for sale on Amazon through the Amazon Marketplace program. Amazon is currently generating billions of dollars in sales for these merchants, and these third-party sales are growing significantly faster than Amazon’s direct business. Merchants typically migrate to where customers are, and the customers increasingly are on Amazon.

This has to be a very big deal for Google. Virtually all of Google’s revenue comes from advertising ($44 of $46 billion in 2012, excluding the Motorola acquisition), and the majority of that comes from search. And possibly their largest advertising category is shopping. Google doesn’t release information on their largest advertisers, but it’s become a sport for third parties to reverse-engineer the results. Take a look at a recent effort by Wordstream in the chart below. They report that four of Google’s largest 10 categories are different segments of retail in which Amazon competes, and that many of Google’s largest advertisers are retailers:

Given this context, it’s not surprising that Google has been hard at work on product search. They recently completed a revamp of their product search results and have significantly enhanced its prominence. Check out this search for a Canon EOS 7D, a high-end camera.

They have also announced new initiatives that at first blush appear atypical for a search company:

In the past few months, Google has launched a test of a same-day delivery service called Google Shopping Express in San Francisco. It’s free for the first six months, and already includes merchants such as Target, Staples, Toys-R-Us and Walgreens.

Through Google BufferBox, Google has plans to place secure boxes in convenient locations throughout a city to which you can have parcels shipped to for easy pickup. They just launched their first location in San Francisco, with many more likely to come.

These initiatives are not about organizing the world’s information, they’re about enhancing the shipping experience on products bought through Google. It’s part of Google’s effort to shore up their start-to-finish shopping experience, trying to bridge their rapidly growing gaps with the hyper-aggressive Amazon and protect their multi-billion dollar advertising business with retailers.

Interestingly, this competition could be used to help explain one of what I initially considered to be Amazon’s more unusual efforts, A9. According to their website, A9 “manage(s) critical capabilities – high availability, cross-platform, scalable products search and an advertising platform that serves advertisers and publishers alike – for our parent company Amazon and other clients.” If I’d read this statement without the company being identified, then I’d have assumed they were describing Google.

E-commerce is clearly the future of retail and there is a growing battle brewing for dominance in this new world. Amazon is bringing a vibrant alternative to product search and they’re threatening one of Google’s core businesses. Google’s market cap as of this writing is $272 billion, while Amazon’s is $113 billion. Godzilla is going to war with Mothra and it promises to be very interesting to watch!